Misrepresentations in an Insurance Application
by Beverly Bell Godbey
Most insureds recognize that material misrepresentations in an insurance application can cause the insurer to seek rescission (void from inception) of a policy issued in reliance on the application if the insured sustains a loss from a risk the insurer would not have covered if the insurer had known the true facts. But, what does the insurer need to prove to obtain rescission? A recent opinion from the Dallas Court of Appeals sheds new light on this thorny topic. In Medicus Ins. Co. v. Todd, 400 S.W.3d 670 (Tex. App. - Dallas, 2013), Justice Lana Myers concluded that rescission requires proof of the insured’s intent to deceive the insurer regardless of potentially disparate language found in the insurance policy or the Texas statutes.
Virtually every type of insurance policy contains language advising the insureds that material misrepresentations in the application can give the insurer the right to void the policy or deny coverage for a claim. Many insureds are not aware, however, that Section 705.004 of the Texas Insurance Code says that these provisions “have no effect” and “do not constitute a defense in a suit brought on the policy.” Because the statute contains an exception to the general rule, further analysis is necessary to determine if rescission remains a potential threat to coverage when the insurance policy contains this type of provision.
The statutory exception applies if it “is shown at trial” that the misrepresentation was (1) material to the risk and (2) “contributed to the contingency or event on which the policy became due and payable.” The statute never mentions intent to deceive. Nevertheless, since 1933, the Texas Supreme Court has imposed an intent to deceive requirement on any rescission lawsuit. The seminal case on the issue, Mayes v. Mass. Mut. Life Ins. Co., 608 S.W.2d 612 (Tex. 1980), lists the elements an insurer must prove before an insurance policy can be rescinded: (1) a representation; (2) the falsity of the representation; (3) the insurer’s reliance on the misrepresentation; (4) the insured’s intent to deceive the insurer in making the misrepresentation; and (5) the materiality of the misrepresentation.
In Medicus, the insurer argued that the Supreme Court’s five-pronged test provided a common law path to rescission and the Texas Insurance Code provided a parallel statutory path. According to the insurer, either path would lead to rescission even though the elements of proof were distinct. In other words, an insurer could obtain statutory rescission without proving the insured’s intent to deceive as required by the common law. In contrast, the insured argued that some form of Section 705.004 had been on the books in Texas since 1903, so the Supreme Court had known about the statute in expressing the five-pronged test and had determined that an intent to deceive was a necessary element of proof for rescission despite the statutory silence on the issue.
After reviewing dozens of cases over the years in which Texas courts had applied the Supreme Court’s test to rescission claims involving every type of insurance policy imaginable (homeowners, life, credit disability, health care, motorcycle, aircraft, and property, just to name a few), Justice Myers determined that the statutes and the common law can and should be read together to determine the correct test for rescission. She held that proof of the insured’s intent to deceive was required no matter how the insurer denominated the rescission claim.
As Medicus demonstrates, insurers face a heavy burden of proof to rescind an insurance policy. Even so, Medicus goes on to confirm that an intent to deceive can be established by circumstantial evidence. In addition, some commercial insurance policies, like Directors and Officers, Employment Practices Liability, Fiduciary Liability, Employee Theft and Professional Liability, contain definitions of “application” that may expand the definition to include documents and information other than the application itself. Examples include financial statements, public filings with the SEC or other regulatory agencies, press releases and other publicly disseminated materials, any of which might contain false statements. Also, some definitions of “application” include applications and documents submitted to prior insurers, thereby further expanding the universe of statements that could form the basis of a rescission action. Notwithstanding the heavy burden of proof, insureds should be careful to read the application carefully, answer all questions truthfully and consult with their broker or coverage counsel in advance of submission to avoid any chance of rescission.
Beverly Bell Godbey is a Trial Partner and member of the Policyholder Practice Group in the Dallas office of Gardere Wynne Sewell LLP. She can be reached at firstname.lastname@example.org.